Businesses seeking long-term success generally adopt a corporate form, which is commonly the private limited liability company (ltd) corporate structure. An ltd cannot have more than 50 shareholders and must restrict the transfer of its shares. There is also the public limited liability company (plc) corporate structure, which can have any number of shareholders, from two upwards. A plc is the required form for companies listed on the stock market. The unlimited liability company is also available, which features unlimited liability of shareholders, but is rarely used. There is also the limited by guarantee corporate form, which is a non-profit sharing corporate structure, used to promote charitable objects. Finally, there is the open-ended investment company, which is allowed to buy its own shares. Some enterprises can only be carried out through a corporate vehicle, including banking, insurance and crude oil exploration and production.
Many small-scale businesses and petty traders carry on business as partnerships or sole proprietorships.
A corporate entity is taxed as a separate legal entity.
The common transparent entities are general partnerships and sole proprietorships, which are often used because they are easier to set up and operate than corporate structures, or are the required form for some professions, such as the legal profession.
The ltd and the plc are the commonly adopted forms of corporate entities in regulated business sectors like banking and finance, insurance, oil and gas and capital markets. Even though limited liability partnerships, which are commonly adopted by private equity and hedge funds, can be set up in Lagos State, there is no nationally applicable law permitting the setting up of limited liability partnerships. Consequently, the entity commonly adopted by private equity and hedge funds in Nigeria is the limited liability partnership set up in offshore jurisdictions with favourable tax regimes.
Tax residence is determined based on the place of incorporation for incorporated businesses. The income of transparent entities is taxed in the hands of their owners, and their tax liability is not affected by their place of residence.
Nigerian companies are subject to income tax on their worldwide profits. Therefore, the profits of a Nigerian company are deemed to accrue in Nigeria, regardless of where they arise.
A non-Nigerian incorporated business is deemed to be resident in Nigeria for tax purposes to the following extent:
It is important to note that on 13 January 2020 Finance Bill (now "Finance Act") came into force following its signing into law by the Nigerian President. The Finance Act amends provisions of the Companies Income Tax Act (CITA), Value Added Tax (VAT) Act (“VAT Act”), Petroleum Profits Tax Act (PPTA), Personal Income Tax Act (PITA), Capital Gains Tax Act (CGTA), Customs and Excise Tariff Etc. (Consolidation) Act (“CET Act”), and the Stamp Duties Act (“Stamp Duties Act”).
One of the major changes sought to be introduced by the Finance Act is the introduction of digital PE for non-resident entities with a significant economic presence in Nigeria.
The FIRS is expected to publish guidance on the taxation of a foreign company with a significant economic presence. The FIRS is likely to rely on the "turnover-based taxation" provided in the Companies Income Tax Act to tax such companies, under which it is empowered to tax all companies, including foreign companies, on a "fair and reasonable" percentage of their turnover, if the FIRS takes the view that the reported profit of such companies is less than might be expected from the relevant businesses. In the case of foreign companies, only the turnover that is attributable to Nigeria will be taxed. The FIRS currently deems 20% of turnover as being a "fair and reasonable" percentage, which is then taxed at the companies income tax rate of 30%, thereby leading to an effective tax of 6% of turnover.
Also, under the Finance Act, payments to foreign companies providing technical, management, consultancy or professional services with a significant economic presence in Nigeria will attract a final WHT of 10%.
The Finance Act requires the Minister of Finance to issue guidance on what constitutes a "significant economic presence" in Nigeria by a foreign company.
With the exception of those engaged in crude oil exploration and production, the income tax rate for incorporated businesses is 30%. Under the Finance Act, small businesses with a turnover of less than NGN25 million will be exempt from income tax, whilst medium-sized companies with a turnover between NGN25 million and NGN100 million would be taxed at a reduced rate of 20%.
There is also a tertiary education tax of 2% on the same tax base under the Tertiary Education Trust Fund (Establishment, Etc.) Act 2011 (applicable only to Nigerian companies). Income tax rates of between 50% and 85% (depending on the nature of operations) are payable by companies engaged in crude oil exploration and production.
The taxable income of businesses owned by individuals directly is assessed for tax in the hands of the owners, while the income of transparent entities is shared and assessed for tax in the hands of their owners.
Individuals are allowed a consolidated relief allowance of either NGN200,000 or 1% of gross income, whichever is higher, plus 20% of gross income. The balance of the income after all deductions will be taxed in accordance with the graduated tax scale rates set out below:
Taxable profits are not based on accounting profits, but are arrived at by aggregating all trading income and then deducting exempt income, allowable expenses, capital allowance (at annually specified rates) and carried-forward losses. Allowable expenses are limited to expenses that are "wholly, exclusively, necessarily and reasonably" incurred in the making of the profits. The test for deductibility does not include reasonableness for companies engaged in crude oil production.
Profits are taxed on an accruals basis and tax is paid on a preceding-year basis, with the exception of tax on profits from crude oil operations, which is paid in advance (in monthly instalments based on forecasts of year-end profits), with reconciliation made at the end of the tax year to reflect actual profits.
There is a 20% tax credit for expenditure on research and development, in addition to the capital allowance (up to 95% in the first year), in lieu of depreciation.
There are no special incentives for a patent box.
To stimulate the financial market, in 2012 the federal government amended the relevant laws to exempt income earned from debt instruments from taxation. Consequently, income from bonds issued by sovereign or sub-sovereign entities and those of corporate bodies are exempt from tax in the hands of the bondholder. Proceeds from the disposal of government or corporate bonds are also exempt from VAT. These exemptions for corporate bonds are only for a period of ten years, and will lapse in 2022.
Interest on long-term foreign loans with repayment periods above seven years (with a two-year grace period), between five to seven years (with not less than eighteen months grace period), and between two to four years (with not less than twelve months grace period), enjoy 70%, 40% and 10% tax exemption, respectively.
Venture capital companies that invest in venture capital projects and provide at least 25% of the total project cost enjoy a 50% withholding tax reduction on dividends received from project companies, capital allowance on their equity investments in venture project companies, and tax exemption on gains arising from the disposal of such equity.
Companies engaged in crude oil production enjoy an investment tax credit (ITC) or an investment tax allowance (ITA) of between 5% and 50% of their qualifying expenditure. The ITC operates as a full tax credit and does not result in a deduction from qualifying capital expenditure for the purposes of calculating capital allowances. The ITA is deductible from profits in arriving at taxable profits.
There are also special incentives available to oil companies to encourage gas utilisation or the development of gas delivery infrastructure. Such companies can offset their gas-related capital allowance against their oil production profits. Given the difference in tax rates between gas production and oil production (30% versus 85%), this incentive has led to considerable investment in gas utilisation projects.
A company engaged in a "pioneer industry" or a "pioneer product" (as designated by the government of the day) may apply for a "pioneer status" which, when granted, entitles it to:
Approved enterprises operating within a free trade zone are exempt from all federal, state and local government taxes, levies and rates.
Loss carry back is not permitted. In amending the law to remove the four-year limit for carrying losses forward, only one of the two provisions imposing the limit was deleted. However, in practice, the FIRS allows an indefinite carry forward of losses for all companies, except insurance companies, which are still restricted to the four-year limit. Under the Finance Act, however, all companies, including insurance companies, are entitled to carry tax losses forward indefinitely.
Income losses cannot be used to offset against capital gains and vice versa.
Existing anti-avoidance provisions allow the tax authority to disallow/reduce interest charged between related parties, where such interest is not reflective of the arm’s-length principle.
However, the Finance Act introduces thin capitalisation rules whereby the tax deductibility of interest expense on a foreign-party loan would be limited to 30% of EBITDA in any given tax year. Deductible interest expense not fully utilised can be carried forward for a maximum of five years.
Nigerian law does not permit consolidated tax grouping; each company within a group is therefore taxable in Nigeria on an individual basis. Consequently, losses suffered by one member of a group of companies cannot be utilised to reduce the tax liability of another company within the group, but can be carried forward and set off against the future profits of the company that incurred them.
A 10% capital gains tax is payable on chargeable gains arising from the disposal of chargeable assets. All forms of property are chargeable assets under Nigerian law, regardless of where they are located, including foreign currency, options, debts and incorporeal property generally, but excluding private motor vehicles. Losses incurred upon the disposal of a chargeable asset are not deductible from other chargeable gains for the purposes of computing capital gains tax.
Gains arising from the disposal of the following are exempt from capital gains tax:
Where the proceeds from the disposal of an asset are used for purposes of financing the acquisition of a similar asset, the person making such disposal may apply to be treated as if the transaction has resulted in neither a gain nor a loss, provided that where the consideration received upon disposal exceeds the consideration paid for the acquisition of a replacement asset, the amount of that excess will be subject to capital gains tax.
VAT is levied on the supply of all goods and services, with a few exceptions, at the new rate of 7.5% (with effect from 1 February 2020), and is collected by the supplier and remitted to the tax authority, except where the supplier is a foreign company, in which case the Nigerian-resident purchaser withholds the VAT and remits it to the tax authority. Oil and gas companies, including oil service companies, and ministries, departments and agencies of governments, and residents receiving taxable supplies from foreign companies, are required to deduct VAT on the invoices from their suppliers and remit it to the FIRS.
A taxpayer is allowed to recover VAT incurred in acquiring stock-in-trade or inventory, but not VAT incurred on overheads and administration, nor on capital assets. Lagos State has also introduced a 5% consumption tax on hotels, restaurants and event centres.
Stamp duty is paid on applicable instruments. The rates differ for various instruments, and can be as high as 6% of the value of the underlying transaction.
The following taxes or levies are notable:
Closely held local businesses commonly operate in corporate form, using the structure of a private company limited by shares.
Corporate rates are not lower than individual rates. The standard corporate rate is 32% (ie, 30% companies income tax plus 2% tertiary education tax), while the maximum tax rate for individuals is 24%.
Where it appears to the FIRS that a Nigerian company controlled by not more than five persons has not distributed profits to its shareholders with a view to reducing the aggregate of the tax chargeable in Nigeria, the FIRS may direct the undistributed profits to be treated as distributed and taxable in the hands of the shareholders in proportion to their shares.
There are no special rules on the taxation of dividends from or gain on the sale of shares in closely held corporations.
Dividends to individuals are subject to a withholding tax of 10%. The tax withheld on dividends is the final tax payable.
Gains on the sale of shares are exempt from capital gains tax.
There are no special rules on the taxation of dividends from or gain on the sale of shares in publicly traded corporations.
Withholding tax of 10% applies to interest, dividends, royalties and rents. This withholding tax is treated as the final tax when the payment is due to a non-Nigerian company. The rate is reduced to 7.5% where the recipient is a resident of a country with which Nigeria has signed a double tax treaty.
Where dividends are paid to a Nigerian company, the amount deducted as withholding tax is treated as franked investment income and is not subject to further tax.
Relief in the form of withholding tax exemptions is available on outward-bound payments where:
Investors have primarily used vehicles set up in the United Kingdom and the Netherlands to make investments in Nigeria (local corporate stock or debt). Vehicles set up in Mauritius are increasingly being used to make investments in the local stock or debt market, even though the double taxation agreement between Nigeria and Mauritius is yet to come into force in Nigeria.
The FIRS does not challenge the use of treaty country entities by non-treaty country residents if the eligibility tests of the relevant double taxation agreements are fulfilled.
The availability of local comparables is one of the biggest transfer pricing issues for inbound investors operating through a local corporation; transfer pricing compliance requirements is another. This is because the FIRS has imposed a minimum of NGN10 million as penalty for each failure to declare relevant group information, disclose related party transaction(s) or maintain contemporaneous transfer pricing documentation, where required.
The local tax authorities challenge the use of related party limited risk distribution arrangements for the sale of goods or the provision of services locally where they determine that the arrangement provides a tax advantage and has not been made on arm’s length terms.
The transfer pricing standards of the OECD apply in Nigeria, together with those of the UN, unless they conflict with the local standards. The local transfer pricing standards conflict with the OECD standards in two major regards.
The first is that, in addition to requiring the arm’s length test in respect of royalty payments, the TP Regulations provide that for the transfer of rights in an intangible amongst connected parties, any amount that exceeds 5% of the EBITDA derived from the commercial activity conducted using the intangible is not deductible.
Secondly, the TP Regulations provide that, for exports, the related party price will be the sale price for tax purposes if it is higher than the quoted price, whilst for imports the quoted price will be the sale price for tax purposes if the related party price is higher than the quoted price.
The local transfer pricing regulations do not make provisions for compensating adjustments. The OECD and UN standards would therefore apply.
Unless granted a special exemption, branch operations by non-local corporations are not permitted in Nigeria. As such, non-local corporations seeking to carry on business in Nigeria must set up a subsidiary for that purpose. There are separate rules for the taxation of local branches of non-local corporations that carry on the business of transport by sea or air and the business of transmission of messages by cable or any form of wireless apparatus.
Gains arising on the disposal of stocks and shares either by residents or by non-residents are exempt from capital gains tax.
There are no change of control provisions that would trigger tax or duty charges for either direct or indirect disposals of holdings.
Formulas are used to determine the income of foreign-owned local affiliates that carry on the business of transport by sea or air and the business of transmission of messages by cable or any form of wireless apparatus.
Where actual profits cannot be determined, the FIRS may apply a deemed profit rate on turnover derived from Nigeria. In practice, profit is deemed at 20%, which is then taxed at the income tax rate of 30%, resulting in an effective tax of 6% of turnover.
Approval is required in order to deduct management fees or expenses relating thereto. Currently, this approval is granted by the National Office for Technology Acquisition and Promotion (NOTAP). Any payment that is made under an agreement that is registered with NOTAP would be tax deductible. In registering a management services agreement, NOTAP considers the reasonableness of the fees payable. Fees between 2% and 5% of profit before tax or where no profit is anticipated during the early years are considered reasonable, or fees ranging from 1% to 2% of net sales during the first three to five years.
Administrative expenses incurred outside Nigeria are deductible only to the extent allowed by the FIRS.
Related party borrowing must be at arm's length and the thin capitalisation rules discussed under 2.5 Imposed Limits on Deduction of Interest would apply.
The foreign income of a local corporation is not exempt from corporate tax, as a Nigerian company is taxed on its worldwide income. However, due to the fact that dividends, interest, rents and royalties earned abroad and brought into Nigeria through the commercial banks are exempted from tax, the foreign income of a local corporation is effectively exempt from corporate tax.
Expenses that are attributable to exempt foreign income would be deductible to the extent that they were incurred wholly, exclusively, necessarily and reasonably for the purposes of making a company’s profits.
Dividends earned from foreign subsidiaries of local corporations would be subject to income tax unless they were brought into Nigeria through any of the commercial banks. Such dividends would enjoy the relief in an applicable double tax treaty where the dividends are not brought into Nigeria through any of the commercial banks.
There are no rules imposing tax on the transfer of intangibles developed by local corporations to non-local subsidiaries for use in their business. However, the FIRS can rely on the general anti-avoidance provisions in the law to attribute a profit to the local corporation if it takes the view that the terms of the transfer of the intangibles do not reflect arm’s length dealings.
Nigeria does not have CFC Rules.
Rules related to the substance of non-local affiliates do not apply in Nigeria.
Local corporations are not taxed on gains on the sale of shares in non-local affiliates because of the exemption on share sales.
There are anti-avoidance provisions in the various tax laws, which empower the tax authorities to make necessary adjustments to counteract any reduction to tax that would result from transactions that are considered artificial. The tax authorities may deem any transaction artificial if they find that its terms have in fact not been effected or, where it is a transaction between related parties, if its terms do not reflect arm’s length dealings.
There is no fixed audit cycle, but large corporates are typically audited annually.
In response to BEPS, Nigeria has signed the following instruments:
Nigeria has also put the following guidelines in place to give effect to the above instruments:
The Nigerian government is keen on eliminating BEPS as shown by its signing, domestication and active enforcement of anti-BEPs instruments. By implementing anti-BEPS measures, Nigeria seeks to eliminate double non-taxation, expand its revenue base and grow its economy.
The tax-to-GDP ratio of Nigeria is amongst the lowest in the world, and the government expects that the BEPS plans will increase revenue from taxation.
International tax does not have a high public profile in Nigeria.
Despite its low tax-to-GDP ratio, Nigeria has competitive tax policies aimed at increasing foreign and local participation in the economy, including the exemption from all taxes granted to entities operating in the tax free zones, the five-year income tax holiday granted to entities in a number of industries, and the exemption of all foreign-earned passive incomes brought into Nigeria through any of the commercial banks from tax.
The lack of anti-fragmentation rules and the lack of CFC rules in the domestic tax legislation are competitive features of the Nigerian tax regime that are vulnerable to the BEPS action plans.
Nigeria does not have domestic rules to deal with hybrid instruments. However, once Nigeria ratifies the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, Article 3 thereof will apply to deal with transparent entities resident in tax treaty countries.
Nigerian companies are taxed on their worldwide income. However, the dividend, interest, rent and royalty incomes of a Nigerian company that are brought into Nigeria through any of the commercial banks are exempt from tax. Other than the requirement to comply with the arm’s length principle, Nigeria does not have interest deductibility restrictions.
Nigeria does not have CFC rules and there are no proposals to implement any.
Nigeria has anti-avoidance rules in some of its tax treaties and has indicated its intention to adopt the PPT and the competent authority tiebreaker provisions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the United Nations Practical Manual on Transfer Pricing for Developing Countries, and all future updates, apply in Nigeria, unless they conflict with the transfer pricing regulations, in which case the latter will prevail.
Nigeria is in favour of the OCED proposals for transparency and country-by-country reporting and, amongst others, has signed the Convention on Mutual Administrative Assistance in Tax Matters, the Country-by-Country Multilateral Competent Authority Agreement, and the Common Reporting Standards Multilateral Competent Authority Agreement.
In introducing digital PE for foreign companies, the Finance Act provides that the income of a foreign company would be subject to tax in Nigeria if it “transmits, emits or receives signals, sounds, messages, images or data of any kind by cable, radio, electromagnetic systems or any other electronic or wireless apparatus to Nigeria in respect of any activity, including electronic commerce, application store, high frequency trading, electronic data storage, online adverts, participative network platform, online payments and so on, to the extent that the company has significant economic presence in Nigeria and profit can be attributable to such activity.”
See 9.12 Taxation of Digital Economy Businesses.
Withholding tax of 10% (which is the final tax) applies to all royalty payments for offshore IP to companies, and the withholding tax is reduced to 7.5% where the IP owner is a resident of a country that has signed a double tax agreement with Nigeria. There are no special rules for IP owners in a tax haven.
With the introduction of digital PE, thin cap rules, and VAT based on the destination principle, amongst others, the Finance Act shows that the Nigerian government wishes to widen the tax net and curb tax evasion and profit shifting in order to increase the country’s tax-to-GDP ratio of 6%, which is one of the lowest in the world.